MW-95 -- October: Always a Dangerous Month

J@pan Inc Magazine Presents:
Weekly Financial Commentary from Tokyo

Issue No. 95
Thursday, October 14, 2004


@@ VIEWPOINT: October: Always a Dangerous Month

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@@ VIEWPOINT: October: Always a Dangerous Month

It is a strange global landscape out there in the investing world at the
moment: there is fear and uncertainty at every corner you turn but there
has so far been no significant reaction in any of the areas one would
have expected. For example, the price of oil has almost quintupled over
the last 18 months; one would expect this to generally depress
the equity markets through expectation of lower profits as input costs
increase and one would expect bonds to fall with an expectation of
increasing inflation. Yet the equity markets appear to be range trading
in general and in the UK and Australia are hitting multi-year highs,
although the bond markets appear almost indifferent. Another interesting
example is the twin deficit in the US. Both the trade deficit and the
fiscal deficit continue to increase. There are debates going back and
forth about the significance of both of these. I personally believe
that where any indicator becomes so extreme it is only storing up
trouble for the future. Yet the US dollar continues to appear very
resilient and has been trading in a range now for almost six months.

But we are in October. Lest we forget 1929 or 1987, it has always been
quite a turbulent month historically, but that does not mean calamity
is around the corner.

Mr. Greenspan continues to act in a very deliberate manner and the
markets appear to have great trust in his ability to manage the supply
of money in the world's biggest economy to ensure that steady growth is
achieved. He has also made a number of statements that he is not so
concerned about the trade deficit but is very concerned about the
fiscal deficit. In step, the current challengers to be the next
US president are promising to control the fiscal deficit.

Oil has risen very sharply, but the overall economic impact for the
major economies, we are assured by the economists, is less now than
in the late 1970s, when it sent the world economy into stagflation.
From my own personal experience of a recent trip to the US, that appears
to be true. All the flights I took around the US were full.
The roads were busier than ever and it was difficult
for me to get a hotel room for five days in Las Vegas.

So is the global economy ready for a large correction or is it climbing
the wall of fear? It is very difficult to tell right now, and every
investor must be on his or her guard. One thing is clear, investing
in Japan continues to look a good strategy.

If the disaster scenario unfolds Japan will be impacted, but there
is some significant underlying value in the Japanese economy now.
Most of the excesses have been squeezed out of the
economy and the last zombies are being put to death with the
restructuring of UFJ. It is hard to imagine a situation that
will cause a further significant drag on the Japanese economy.
The ongoing restructuring, the better allocation of capital and
resources are all realizing value from the economy. There appears
to be real determination from the Koizumi government to break up
the post office, which will only continue to release further value
into the economy as capital is more effectively deployed
with one more government subsidized entity taken out of the
financial system.

The positive scenario is that Japan, well poised to supply most
of the world with electronics and leading-edge motor cars and
significant chunks of Boeing aircraft, will feel the upswing
from any global economic rise plus a kicker from domestic
restructuring and more efficient capital distribution.

The structural story is a multi-year phenomenon. The global
story will most likely resolve itself after the US election.
We remain positive on the Japan story and reasonably
confident that October will not be catastrophic in 2004.

-- John Charles-Decourcy

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Written by John Charles-Decourcy (

Edited by J@pan Inc staff (


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